Milk marketing: Things to think about, Part II

Margot Rudstrom

Published in Dairy Star October 7, 2005

Margot Rudstrom

Part I (August 27 th publication) in this series of three articles
on milk marketing gave a framework for answering the question "What
do I need for a milk price?" Your
answer to this question provides you with a target price.
The next question to ask is Part II in this series, "What
is a good price for the Market?" Can you expect
to receive your target price consistently?

There are a couple of points I will touch on in this
article. First, a good price for the market needs to be
assessed month my month. Second, there are a number of
milk price information sources that you can access.

There usually is a seasonal pattern in milk prices. I
say usually, because the pattern did not hold in 2004.
Milk price is usually lower in the spring months and higher
in the fall months. Figure 1 shows the average monthly
Class III price from 1999-2003. The lower price in the
spring is the result of increased milk production from
the spring flush. The higher prices in September and October
are usually the result of cheese and butter processors
building stocks for the holiday baking season and Super
Bowl parties.

Figure1: Class III Monthly Milk Prices

It is much easier to predict
the past than the future. One marketing service provides
the disclaimer "Past
performance does not indicate future results." The
high milk prices in 2004 provide a good example of past
performance not being indicative of future results. In
fact, they ran counter-cyclical to what is normal. That
is, the highest milk price month in 2004 was May, which
is normally the lowest milk price month.

What's a good price for the market? I have a set
of numbers that I look at in judging whether a price being
offered is a 'good' price. I look back over
the past 10 years because it gives me a long enough history
to feel comfortable in making a marketing decision. The
benchmarks I use in my marketing plan are monthly median
and top third for Class III prices. I also look at the
all-time highs (maximum) and lows (minimum) for each month.
The 10-year monthly minimum, maximum, average, median and
top third prices are listed in Table 1.

I keep a copy of this table close by
when I check where the Class III milk futures contracts
close for the day on the Chicago Mercantile Exchange (CME).
I can tell at a glance where futures contracts are trading,
relative to my benchmarks. You can check the closing milk
prices at the Chicago
Mercantile Exchange website.

The University of Wisconsin provides
a number
of useful graphs on the daily CME cash settle prices.
These graphs let you see at a glance, where contracts
settle relative to an average, top third and bottom third
prices.

There are a couple of key points
that must be made about identifying a 'good' price
from the market. First, you must be comfortable with the benchmarks you choose.
Table 2 gives the 15, 10, 5 and 3-year average prices.
You will notice there are differences in the numbers when
they are calculated over different time periods. Take January
for example, the 3 year average price is higher than the
5-year average price but lower than the 10 year-average
price.

Table 2 : Average Class III milk prices ($/cwt)

Month

3-year
(2002-2004)

5-year (2000-2004)

10
year (1995-2004)

15-year (1990-2004)

January

11.09

10.66

11.89

11.87

February

11.06

10.60

11.34

11.33

March

11.42

11.04

11.66

11.56

April

13.31

12.28

12.08

11.98

May

13.70

12.86

12.21

12.08

June

12.51

12.40

12.26

12.15

July

11.99

12.42

12.70

12.46

August

12.46

12.61

13.25

12.83

September

12.98

13.12

13.72

13.20

October

13.09

12.78

13.10

12.72

November

12.73

11.62

12.22

12.09

December

12.58

11.78

12.34

12.06

The second point is that the price that you need to be
profitable must be a good price for the market.
During our marketing workshops, we often make the comment
that "The market doesn't care what you need
for a price."

Where do we stand? We have target prices that we determined
for our individual farming operations. We have information
about what are historically good prices for the market.
If the price you need is being offered by the market, the
next step in implementing your marketing plan is taking
action. There are several pricing tools available that
can be used to be proactive in pricing your milk. Pricing
tools is the topic for the third and final part of this
series coming up with the November 26 issue.